Transcript Slide 1
Indian Weather Markets….. Weather Risk Management Services Pvt. Ltd. Read how organizations describe their exposure… Indian Market…… o o o o o o EID Parry sales, net down 86 pc on monsoon failure. - The Hindu, Jan 17, 2003 The Company's business is seasonal in nature and the performance can be impacted by weather conditions - Notes to Accounts, Syngenta (I) Ltd. Monsanto India continued its strong profit growth on the back of positive allround business performance aided by a good monsoon. - Annual Report 2003-04, Monsanto Ltd The delayed monsoon has hit the fertilizer stocks badly. - Analyst, Hindu Business Line Over 1000 farmers commit suicide in vidarbha and Telangana in last two years – TOI An average drought costs upto Rs 4 bn to the state exchequer,Gujarat earthquake resulted in direct damages of about Rs.153 billion -NDMC Indian Market 45000 3000 40000 2000 production 35000 1000 30000 0 25000 -1000 20000 Function(rainfall*temp) Impacts Yields -2000 15000 10000 -3000 1 2 3 4 5 6 7 8 9 10 11 12 13 100000 20000000 95000 15000000 90000 10000000 85000 5000000 80000 0 75000 -5000000 70000 Production -10000000 year Function of rain*temp production years Impacts on Acreages Impact on Prices 2003 2004 2005 2006 Area Sown 40.908 44.439 41.922 45.501 Yield in Kg/Hect 1019 824 796 Prices before sowing (May & 1610 June & July) Rainfall 1520 1380 Actual % Dep Price 1810 1680 1839 1268 1285 1301 1323 1260 1263 Actual % Dep Price Actual % Dep Price Actual % Dep Price June 129 22 1520 81 -25 1680 82 -24 1285 26 -83 1260 July 315 3 1380 215 -30 1839 379 24 1301 282 1 1263 Aug 216 -32 1250 423 34 1891 132 -58 1265 459 58 1261 Sept 259 45 1380 47 -73 1724 165 -6 1218 257 57 1238 Impact of Weather on Farming o o o o Makes the earnings volatile, Affects working capital repayment Affects contractual obligation In plantations/ corporate Farming Fixed : Variable cost ratio is high High Fixed Costs puts profits under pressure • When production reduces in the key producing months o Happens primarily on account of weather Possibly affects expansion plan when price outlook is positive Impact of Weather on Farming Stages: Establishment Time: 15 May-10 June Rainfall Index: Flowering & Veg Growth 11 June – 31 July 60mm 160mm Pod Formation & Maturity Aug 1 – Sep 30 100mm When to harvest ?? Which crop to go for ?? When to apply pesticides ?? Seed Sale = f (Acreages, Competition) Acreage = f (Onset, Price, Credit) Seed Sale = f (Acreages, Competition) Acreage = f (Monsoon Onset, Price, Credit) Around 60% sowing finishes by 20th July Seed Sale = f (Acreages, Competition) Acreage = f (Monsoon Onset, Price, Credit) Effect of last years prices on acreage 2000 1500 2 1000 1 500 0 last years av price(Rs) acreage (lha) 3 0 2004 Buldana 2005 Nagpur 2006 Last yrs price(Rs) Pesticides Sale = f (Acreages, Weather Conditions during Vegetative growth, Competition) Pesticides Sale = f (Acreages, Weather Conditions during Vegetative growth, Competition) Weather & Agri-Value Chain Credit Risk Agro-processor Farm Equipment Agro-processor Higher Inventory Farm Equipment Pesticides Pesticides Seed Seed Loss of sales opportunity Agro-processor Farm Equipment Fertilizers Fertilizers Value Destruction - Weather Pesticides Seed Fertilizers Farmer Farmer Farmer Weather Becoming More Extreme o Extreme rainfall incidents have seen a huge jump in recent decades over northwest India (including Maharashtra and Gujarat) during the summer monsoon o Orissa has been reeling under contrasting extreme weather conditions for more than a decade: from heat waves to cyclones and from droughts to floods. The death toll due to heat waves in Rajasthan, Punjab, Gujarat, and Bihar is on the rise o The coastal regions have been undergoing stronger wind and flood damage due to storm surges associated with more intense tropical storms in recent years. Frequent inundation of low lying areas, more flooding and increase in the salinity of rivers, bays and aquifers in the coastal regions have occurred more often during the past decade. Weather risk management Financial weather risk is the occurrence of an observable weather event or variability in a measurable weather index that causes losses either to property or profits for an individual, government or corporation. Weather risk management products – packaged as either (re)insurance or derivatives – are settled off of the same index that has been determined to cause losses and reduces weather risk through mitigating payouts. Manageable weather risks Temperature Precipitation Snowfall Wind Speed Streamflow Sunshine hours Soil Moisture Humidity Hurricanes A WEATHER INDEX IS GENERALLY CONSTRUCTED AS A FUNCTION OF FREQUENCY OF OCCURRENCE AND MAGNITUDE OF EVENT Weather impacts volume PRICE PRICE RISK MANAGEMENT x + VOLUME WEATHER RISK MANAGEMENT = REVENUE LOWER EARNINGS VOLATILITY Less volatility equals greater value Historical Revenues UNHEDGED Expected Revenues Without Weather Protection $75 Million HEDGED Expected Revenues With Weather Protection $73 Million U/H H Earnings $75 M $73 M EPS $0.75 $0.73 8x 9x Stock Price $6.00 $6.57 Market Cap $600MM $657MM Debt $100 M $100 M COD 8.00 % 7.90 % Debt Svc $8.0MM $7.9MM Multiple Reducing the volatility due to weather has a budget cost but increases returns per unit of risk and can potentially improve stock valuations and the cost of/access to financing. Sales Expansion Thru Weather Insurance Example (Case for possible expansion in sales, faced with high weather risk) Threshold return on capital 25% Budget capital 250 lacs Without Weather Insurance Sales in an area 160 lacs Potential profit in an area 50 lacs Lower profits due to lack of scale Risk Capital Employed due to Non Weather Risks 160 lacs Assumed @ Rs 1 per unit of sales Risk Capital employed due to weather 96 lacs Assumed @ Rs. 0.6 per unit of sales Return on capital employed 20% With Weather Insurance •Larger scale may also ensure reduction in price of seeds, thereby facilitating sales • Several precautionary measures built in sales process to tackle weather risk, which inhibit sales; scope for process improvement Potential sales in an area 250 Improved sales Potential profit in an area Weather Insurance Premium Profit after Insurance Risk Capital Employed due to Non Weather Risks Risk Capital employed due to weather Return on capital employed 125 12 113 Improved profits due to larger scale @ 8% of Risk Capital due to weather 250 Assumed @ Rs 1 per unit of sales 0 45% Beating return on capital threshold Sales can be expanded in several areas where sales are presently subdued due to weather risks Organizing Real Time Data On Site wireless Sensors o Covering important agricultural zones real time, at a cost of approx. Rs.500 per sq.km or Rs.5 per ha o Generation of Historical records for any given long.- lat. Position Processing of data received from sensors and converting it according to specific product • Statistical & Neural Network model Farmers Console (GIS) o Building UAV and Advanced remote sensing applications to assist this Spatial Interpolation RMS error ( under square root transformation) ~ 2mm Decision Support System Forecast Inputs Front-end Output Identification & Quantification of the Risk Simplified output in vernacular language for farmers Scientific modeling of risk Current Weather Data Needs to be customized for Bank’s portfolio -Crop Planning -Irrigation planning -Pest Management -Yield forecast -Risk Transfer Hybrid Products – Filling the Gap Thank you More on Monsoon and ENSO El Nino/La Nina association with all-India summer monsoon rainfall anomalies during 1871-2001 Number of years with … Deficient monsoon Deficit>10 % Normal monsoon(ve) 11 11 4 0 1 Other 11 Total 22 El Nino La Nina Normal monsoon (+ve) Excess monsoon excess>10 % Total 0 26 9 8 18 23 42 11 87 35 55 19 131